Spotlight on NAFTA: Still on the Brink (October 2017)

As part of our renewed focus on the Western Hemisphere, the Blue Star Brief is pleased to introduce “Spotlight on NAFTA,” a feature that will track what is occurring behind the headlines as the United States, Canada, and Mexico try to complete negotiations by the end of 2017.

Tensions are quickly escalating around the talks to renegotiate the North American Free Trade Agreement (NAFTA). Hanging in the balance is the fate of world’s largest free trade area linking 444 million people producing $17 trillion in goods and services.

What is happening?

Three-way negotiations between the U.S., Canada and Mexico have been launched and are continuing at an intensive pace. The third round took place in Ottawa and wrapped up on September 27, and the next negotiating session will take place this week in Washington from October 11 to 15. After the third round, negotiators released a joint statement that said the negotiations on the chapter dealing with small and medium enterprises had been substantively completed and that the chapter on competition was near completion. They also emphasized that “Ministers from all three countries have reiterated the mandate to the Chief Negotiators to continue on an accelerated path.”

What are people saying?

On September 28, U.S. Trade Representative Robert Lighthizer said the goal of reaching a deal this year is "very, very optimistic" and will be "very, very difficult. But there are reasons to do it. So when there are reasons to do it, we have a lot of motivation."

This week, President Trump told Forbes magazine, “I happen to think that NAFTA will have to be terminated if we’re going to make it good. Otherwise, I believe you can’t negotiate a good deal.” Trump added that the Trans-Pacific Partnership “would have been a large-scale version of NAFTA. It would have been a disaster.”

In a trip to Mexico, U.S. Chamber of Commerce President Tom Donohue said, “Let me be forceful and direct. There are several poison pill proposals still on the table that could doom the entire deal . . . If the administration issued a withdrawal order, which requires a six-month waiting period, it would not be viewed by our partners in Canada and Mexico as a negotiating tactic. Instead, it would abruptly slam the door on future negotiations because those governments have made it very clear that they won’t negotiate with a gun to their head.”

On October 10, Mexican Foreign Minister Luis Videgaray testified to the Mexican Senate that “we always have to be ready to get up from the table. This is a logical position in any negotiation. It’s also a principle of dignity and sovereignty . . . Mexico is much bigger than NAFTA and we have to be ready for any scenario in the negotiations.”

On October 10, Canadian Minister of Foreign Affairs Chrystia Freeland said, “What we’d like to do with NAFTA is to modernize it. This is a 23-year old agreement and the economy has moved on.” She added, “I think that this is probably the most uncertain moment in international relations since the end of the Second World War.”

What are the sticking points?

U.S. Trade Representative Lighthizer said the United States would “hopefully” present draft text by the next round on the complex issue of rules of origin, which outlines how much of a product (such as cars) needs to originate in a NAFTA country.

The U.S. also plans on presenting its stance on the dispute settlement mechanism, also called Chapter 19, in the next round. This is tricky because the U.S. desire to eliminate Chapter 19 is deeply opposed by Mexico and Canada.

The U.S. is considering a proposal to introduce a “sunset clause” that would mean that the U.S., Canada and Mexico would have to recommit to the agreement every five years, or the agreement would expire.

The U.S. may also present a proposal to eliminate preferential tariffs on textiles from Canada and Mexico in the fourth round – this was vigorously criticized by officials from the other two countries.

After the third round, Canada declared that the American side’s failure to present specific language on major goals such as rules of origin was holding back progress.

Canada is continuing to press for new language on gender rights and climate change.

Mexico has also continued pushing back on the U.S. position regarding the need to lower the $55 billion trade deficit with the Mexico, warning that it would unleash a wave of protectionism.

What’s next?

The next negotiating session will take place in Washington from Oct. 11-15th and the U.S. has said that it is prepared to tackle difficult topics such as the rules of origin issue and dispute settlement mechanism. Canadian Prime Minister Justin Trudeau meets with President Trump on October 11 to discuss the NAFTA negotiations before making his first official visit to Mexico on October 12 and 13 to discuss trade issues with Mexican President Enrique Pena Nieto. With the outcome uncertain, observers believe that the clock is now ticking in earnest on whether the current NAFTA negotiations are viable.